Dairy prices and the NZ economy

Release date

12 June 2007

Reserve Bank Governor Alan Bollard said today that the
current trend in commodity prices, especially for dairy, is very good news for
the New Zealand economy, though it presents some challenges for monetary
policy.

In a speech to the
Waikato Grasshoppers, Dr Bollard said the Bank is analysing the developments in
the dairy sector and will remain focused on medium-term inflation pressures.

Dr Bollard said that from a monetary policy perspective, a terms of trade
shock of this magnitude poses some challenges. "It will affect inflation
by creating higher domestic dairy product prices and the higher dairy prices
will provide a substantial boost to rural incomes.

"Of course this is great news. However, we are dealing with a
stretched economy at present. Domestic demand is already strong and capacity is
tight. If this extra income is spent and/or invested by farmers it will add to
this domestic demand pressure."

Dr Bollard said that any predictions of future dairy prices would involve a
range of uncertainties.

"However, current spot market shortages do seem to suggest dairy prices
are likely to remain at high levels in the short term, and there is no
compelling reason to suggest that strong global demand for dairy products will
slow markedly anytime soon," he said.

"As noted in our June Monetary Policy Statement, while there
are uncertainties about the future path of these prices, the increases will
assist in narrowing New Zealand's trade deficit. The rise in dairy sector
incomes will provide a substantial boost to economic activity over the next few
years, but, to the extent the income boost is spent, will also add to inflation
pressures," said Dr Bollard.

Related resources

Sign up for email alerts

The Reserve Bank’s email Service is a free service that allows you to get the latest information from the Reserve Bank. Subscribers will be emailed Monetary Policy Statement news releases, OCR announcements and other public statements as they are posted on the website.